Return Fraud: What It Is, and How Merchants Can Fight It
Return fraud occurs when customers steal from a retailer by returning items that do not qualify for a return or refund. This can be the result of an honest mistake on the part of the consumer, but an increasing number of cases involve premeditation and malicious intent. Regardless of how it happens, though, return fraud is a real and growing threat to merchants, resulting in substantial revenue loss.
What Is Return Fraud?
- Return Fraud
Return fraud refers to the act of returning merchandise to a retailer for a refund, in violation of the merchant’s stated returns policy. The merchandise may be ineligible for a refund because it was purchased from another retailer, or because the item is used, or was marked as otherwise ineligible for a refund before purchase.
[noun]rə ● tərn ● frôd
Returns, of course, are an important part of any retail business. Knowing a product can be returned increases customer confidence, allowing them to feel more secure in buying from you. In 2020 alone, buyers returned roughly $428 billion in merchandise to retailers; that total represents over 10% of all US retail sales for the year.
According to a study by the National Retail Federation and Appriss Retail, however, nearly 6% of those returns—some $25.3 billion—were fraudulent. In other words, return fraud costs merchants $5.90 for every $100 of accepted returns.
With return fraud, consumers bring an item (or items) to you and request a refund in the form of store credit or cash. However, the return request is invalid; for one reason or another, the customer does not have a legitimate right to a refund.
There are several reasons why many merchants turn a blind eye to suspected return fraud. For instance, there’s the fact that a claim can often be your word against the cardholder's. Customers can use various excuses to claim a return, but you have no definitive way of verifying their claim.
And, even if you suspect fraud, you don’t want to risk alienating customers by making unprovable accusations. Angering customers can lead to reputational damage. Even worse, a buyer may file a chargeback to get their refund from the bank, rather than through the proper channels.
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Return Fraud Tactics
As we mentioned earlier, it’s possible to commit return fraud innocently. A customer may not have read your return policy, or they may return the item to the wrong store by accident. To illustrate, think about retailers like Lowes, Home Depot, and Menards, which stock many of the same items. Without a receipt, it’s hard to prove someone didn’t purchase the item from one or another of those retailers.
That said, there are a number of tricks fraudsters use to intentionally commit theft through your returns process. A few of the more common tactics include:
Fraudsters can find sites that sell fake digital or physical receipts. The thief uses these resources to commit fraud without making a purchase from the targeted retailer.
Returning Shoplifted Goods
Bad actors shoplift merchandise, then “return” the item without a receipt for a refund or store credit.
The fraudster makes a purchase, leaves the store, then reenters later, and picks up an identical item. The thief uses the original receipt to secure a refund on the second item, effectively getting the first item for free.
Shoppers buy merchandise but plan on returning the items after initial use. For example, an expensive outfit that is worn once then returned, or a book that is returned after reading.
Fraudsters secure valid receipts that have been discarded or stolen. Using the receipt as a type of “shopping list,” they select items on the receipt and return them for a refund.
Buying an item at one price, then switching the tag with that of a higher-priced item before returning the item for a refund.
Merchandise Exchange (Arbitrage)
Shoppers purchase a new item, then return an older or non-working version of the same item, using the packaging from the newer merchandise. Another version of this scheme involves swapping similar-looking items with different features and prices, then returning the lower-cost one and passing it off as the expensive item.
Return fraud scams are not solely practiced by individuals. Large, multinational crime rings may be the perpetrators, but so might your competition. A competing seller may purchase a large amount of a product in your inventory, then wait for you to restock. The competitor waits then brings everything back and demands a refund, meaning you’re now stuck with much more inventory than you anticipated.
Many of these tricks are harder to pull off in a physical store thanks to the use of bar codes on products and receipts. That’s why return fraud is even more of a threat for eCommerce merchants.
Top 5 Tips to Avoid Return Fraud
Many instances of return fraud can be countered by implementing best practices for prevention. This can be a delicate balance between preventing fraud and serving customers.
With all that in mind, here are five simple steps you should take to avoid return fraud and minimize your risk:
Fine-Tune Your Return Policy
Develop and implement a clear, reasonable set of parameters for returns. Your policy should be practical, yet adaptable. Things to consider include:
- Expectations: Clearly define the condition in which merchandise should be returned. For instance, specify that goods should be unopened, with tags attached, including invoice or other product-specific data such as serial numbers.
- Time Limits: Set a time limits for the return of merchandise. The timeframe is usually a few weeks, but can vary. Some mattress manufacturers, for instance, offer up to one year to make returns.
- Return Shipping: For card-not-present purchases, you should specify how return shipping should be done. Include such things as acceptable carriers, packaging, and insurance requirements.
- Fees: Are there additional charges associated with the return, such as a restocking fee? Who will pay for return shipping, if necessary? Will you supply a return label on request?
- Exceptions: If certain merchandise (such as a customized item) is subject to alternate policies, be sure to thoroughly explain this difference and get confirmation from the customer prior to the sale.
- Special Circumstances: Your standard return policy may vary depending on the product category, location, currency, or other conditions. For example, international customers may require more time for returns.
Make Sure Your Policy Is Accessible
More than two-thirds of online shoppers will insist on reading your return policy before deciding to buy. If customers can’t find or understand that policy, however, it might as well not exist. Once you developed a transparent return policy, you must make sure those rules are easily accessible. This means prominently displaying the policy in as many places as possible. Your terms should be easy to find from every page of your website (including checkout), on invoices and other customer records, on receipts, and even on packaging.
Your return policy should be a mandate. However, what happens when a customer narrowly misses the cutoff date for a return or explains that they ordered the wrong item as a gift? Being flexible here is a great way to build brand equity and long-term customer loyalty. Keep in mind, one of the top reasons customers commit friendly fraud is convenience. Making your return policy as customer-friendly as possible takes away a primary incentive for cardholders to contact the bank.
Transform Returns into Opportunities
Returns are an unfortunate part of retail. If leveraged properly, though, each one is an opportunity to create new sales and build customer relationships. Consider offering customers the option to trade a returned item for 10% more than its value in-store credit. This is a win-win for you and your customer. The buyer may never use the credit; in fact, over one-third of store credits are never used, with the average value of unused store credit (including gift cards) sitting at $167 per person. Even if the credit is used, the customer will often make additional purchases at the same time. They’re happy, and you’re happy.
Consult the Experts
Still concerned about your ability to fight back and avoid return fraud? It may be time to call in outside assistance. At Chargebacks911®, we create custom chargeback management strategies for merchants, tailored to your company’s unique needs. Contact us today to learn how we can help you fight back against return fraud, friendly fraud, and many other threats.
Q: What is return fraud?
A: Essentially, return fraud refers to the practice of claiming an invalid refund from a merchant. The return may violate the merchant’s policies, or the fraudster may attempt to swap the new merchandise for a used, broken, or lower-quality item.
Q: Is return fraud illegal?
A: In most cases, return fraud is considered theft or robbery. Depending on state and local regulations, it may be either a felony or a misdemeanor, punishable by jail time, house arrest, probation, and/or considerable fines.
Q: How do fraudsters commit return fraud?
A: There are a number of situations that could be considered return fraud. Common tactics include wardrobing (or “free renting”), returning stolen merchandise for a full refund, price tag switching, and substituting a cheaper item for a higher quality one before attempting a return.
Q: Can best practices prevent return abuse?
A: Yes. By making your return policies more customer-friendly, and ensuring those policies are transparent and easy to find, you can keep return abuse to a minimum.